THE DRIVE TO CONVERT TO DC: A SHORT HISTORY

Felicity Callard, Birkbeck, University of London 3 April 2018

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The Drive to Convert to DC: A Short History Felicity Callard, Birkbeck, University of London

The current industrial dispute between UUK (Universities UK) and UCU (University and College Union) needs to be understood in the context of a longer-term interest that UUK has had in making what they have called ‘radical changes’ to DB (Defined Benefit) pensions by replacing them with various kinds of DC (Defined Contribution) ones, for which employees will bear all or most of the risk. This can be pieced together from various documents that have been published from 2014 onwards by UUK and the USS (Universities Superannuation Scheme) Group of the EPF (Employers Pension Forum) (the group set up by UUK, GuildHE and UCEA (Universities and Colleges Employers Association) in 2007 to establish strategy for HE (Higher Education) pensions). Taking this longer perspective reveals a carefully laid direction of travel. The abolition of DB is a long-term ambition for UUK and a number of our employers, and there is no sign that UUK have abandoned it despite the setbacks they have faced during this particular industrial dispute. Indeed, the UUK-drafted proposal of 23 March states that ‘both sides agree to continue discussion on … alternative scheme design options’ – which could be interpreted as a mark of UUK’s ongoing interest in dispensing with DB pensions.

Documentation from UUK, sometimes produced in surprisingly intimate alliance with USS, and often with the assistance of external consultants, suggests that UUK has strongly influenced, rather than simply gathered together, the views of the universities it represents (see USSbrief 5: ‘The Role of Consultancies in the USS Dispute’). The creation of the two-tier USS pension benefits system in 2011, and the move from final salary to career average pensions in 2014, demonstrate the path of pensions degradation. The current dispute has become, for many in UCU, a moment to fundamentally contest the logic on which the destruction of Defined Benefit pensions has been built. This brief outlines that logic for the first time. It presents select examples that demonstrate the longer history of moving towards the eradication of DB pensions in higher education, and indicates how we might interpret this in the context of wider social and political processes.

It is worth offering a shorter narrative to readers without the time or inclination to follow the whole story through to the end. As recently as a decade ago, pension changes that involved any transfer of risk from employer to employee, including much softer options than full DC schemes, were regarded as ’startling’, and there was hardly any appetite among employers to move in that direction. By 2014, however, things were changing. UUK had at this point been working for a number of years with the pensions consultancy Aon Hewitt, which is a longstanding proponent of various forms of Defined Contribution scheme. UUK began canvassing employers aggressively on the merits of reducing or even abolishing the Defined Benefit elements of USS, using loaded survey questions. Already, UUK were starting to exhibit their now-famous taste for misrepresenting the results of employer consultations, highlighting the fact that a ‘significant minority’ of employers reported an interest in ‘more radical action’ on pensions, as if that meant anything other than that the majority of employers were not interested in them. At the same time, the USS fund managers appeared to be working in alliance with the employers, drawing employers’ attention to a potential ’radical solution’ to the alleged costs and risks of DB schemes as if such solutions were inevitable. Meanwhile, UUK and Aon Hewitt’s joint campaigning to ‘educate’ employers about the merits of ‘benefit reform’ options in the form of various kinds of

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DC pensions continued. At the same time, extra incentives for such reforms were provided by broader changes in pensions law and the higher education funding landscape.

If employers, consultants and the USS fund managers gave any thought to employees in their discussions with each other, they did so in a one-sided way: they simply offered the consoling thought that employees would be attracted to the ‘choice’ and ‘flexibility’ of DC schemes. With hindsight, we can see that this assumption was wrong. But UUK and their allies pressed on regardless, launching their bid to convert the entire scheme from DB to DC in November 2017, and triggering the largest strike action in the history of British higher education. Since then, employees have finally started to scrutinise their machinations. What follows is a more detailed, blow-by-blow account of how UUK reached that point.

2014

February       From the start of 2014, UUK’s interest in making ‘radical changes’ to DB pensions is clear. We can begin with February’s web survey with employers in the lead up to the triennial actuarial valuation of USS a month later. The survey was designed and hosted by the pensions consultancy Aon Hewitt, with whom UUK have had a long relationship (see USSbrief 5). Question 14 asked employers: ‘Would you prefer to focus primarily on on extending CRB [career revalued benefits] for all, leaving more radical changes for a later date?’ – with fixed answer possibilities that included ‘Prefer more radical change immediately’ and ‘Strongly prefer more radical change immediately.’ Question 16 asked: ‘Do you support the following changes to future benefits, if needed to keep contributions affordable?’ Fixed answer possibilities included:

• moving existing final salary members to CRB [career revalued benefits] • reducing CRB • hybrid DB/DC • pure DC • collective DC.

It is also worth noting the wider context here. In the same month as UUK and Aon issued this survey, Aon was calling on the UK Government to concentrate on developing collective DC.

July        UUK reported on its spring activities in a publication titled ‘USS funding and benefits – consultation by Universities UK’. In it, they noted that they had commissioned the actuarial consultancy Aon Hewitt ‘to advise the USS Group of the Employers Pension Forum (EPF) on potential benefit reform options’. The document noted that the ‘option of moving to a DC scale for al future accruals’ was considered and that a ‘significant minority of institutions … supported a full move to DC in the earlier [UUK] consultation’ (but that the majority wanted to maintain a ‘core” DB element’ (p.5).   

September       A conference presentation jointly presented by USS and EPF demonstrates both the tight relationship between these two organisations, and how much the possibility of making ‘radical changes’ to pensions was a live issue in the autumn of 2014. Available slides from the presentation given at the Association of Heads of University Administration (AHUA) conference – a conference not accessible to most university staff – show its authors were Bill Galvin (appointed USS Group Chief Executive Officer in 2013) and Brendan Mulkern (USS Chief Policy and External

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Affairs Officer till 2016), and Will Spinks and John Neilson (as well as being part of the Joint Negotiating Committee, they were Registrar and Secretary of the USS Group of EPF in spring 2014). One slide, titled ‘The Triangle of Compromise’ indicates three axes on which to manoeuvre: investment de-risking, employer contributions, and benefit changes. Benefit changes includes the phrase ‘Redefine final salary a “given”? CRB for all or more radical solution?’ [italics added] (Figure 1).

2015–2016

UUK’s interest in the potential for making more radical changes to pensions had been given added impetus by changes in government policy. The Queen’s Speech of June 2014 had announced the Private Pensions Bill, with its key focus on increasing choice. From 2015, budget changes meant that everyone with DC pensions was given greater flexibility.

UUK maintained its relationship with pensions consultancy Aon Hewitt. USSbrief 5 discusses, in this regard, the pensions conference that was organised by UCEA in June 2015, which featured a presentation by Aon Hewitt intended to contest the ‘DB good, DB bad’ viewpoint in relation to pensions provision. One year on, in 2016, UUK worked with Aon Hewitt as it developed town hall events for employers on higher education pensions strategy.

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The briefing documents for these town hall meetings, issued by EPF, were prepared before the USS valuation (September 2016) and oriented both the topics and framework for discussion. The need for flexibility was very apparent. In its briefing paper on drivers and objectives, for example, the EPF noted that employers and representatives should consider, amongst other things (p. 8; italics added)

• The flexibility needed by individual employers to control costs whilst providing an attractive benefit package

• Seeking more fundamental benefit reform of USS pension provision

The paper also noted that these options would be ‘set out in more detail’ by UUK’s actuarial advisors Aon during the town hall meetings ‘to help employers understand the opportunities and challenges they each present’. The briefing also noted that after the final town hall event, there would be a web survey seeking institutions’ views: the sector needed to decide whether to keep the status quo ‘or alternatively make more fundamental changes to the current framework’ (p.8).

2017

UUK and EPF report on findings of the web survey in their February update to employers on guiding principles. The update announces guiding principles that should provide a ‘first step towards the development of a long-term strategy for USS’. These principles, ‘developed through detailed consideration of the financial, competitive and workforce trends in the sector’ as well as in relation to ‘findings from the recent engagement with USS employers’. One principle is that ‘[i]nstitutions should have more flexibility to adapt pension provision as appropriate to their needs and those of their employees’; another is that ‘Employees should have more choice and control over their pension saving’.

Given the town hall events, and the briefings that preceded them, it is not surprising that the update indicates strong support from employers around flexibility and choice. The update noted that ‘Institutions need to have the flexibility to rebalance reward packages and resources to meet the differing needs of staff’, and report that ‘an overwhelming majority of employers (75%) indicate that they would strongly agree or somewhat agree to greater flexibility in the pension options available to employees’ (p. 11). There was particularly strong support for this from Oxbridge, with 50% reporting ‘strongly agree’ to the question ‘My institution wants greater flexibility in the pension options available to employees’.

The impetus towards increased flexibility and choice needs to be understood in relation to the wider logics of marketisation and financialisation surrounding UK higher education (see USSbrief 3), and would, of course, exacerbate a number of existing inequalities (see USSbrief 4).

A decade of profound transformation

There have been profound changes in employers’ views over pensions and risk in the space of a decade. Back in 2007, in a report for UUK by Hewitt Consulting, employers were largely consistent in arguing that there should be risk-sharing between employer and employee (a move that the report described as ‘startling’ since it would represent a ‘significant move’ in how were

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pensions were designed at that moment (final salary pensions)). Notably, though, in the 10-point position scale, not a single university’s response fell within the three points closest to the statement ‘We want the employees to bear all the risk’ (p.15). That in the course of a decade UUK, in alliance with other actors, policies, and certain universities, has been able to effect a shift to one in which employees are expected to carry all the risk (DC pensions) is remarkable and demands further analysis and investigation.

For now, it is worth considering whether and how the shift in employers’ positions is associated with other changes in the financing of higher education that were taking place at the same time (see also USSbrief 3: ‘The Pensions Dispute and the Marketisation of Higher Education’). In 2010, Policy Exchange, a UK think tank on the right, published a report in support of increased tuition fees in which ‘pension reform’ played a significant part:                        

Tackling USS, the second largest private pension scheme in the UK, is a necessary stepping stone in addressing the pension problem. The Joint Review Group looking at USS, chaired by Andrew Cubie, hopes to reach a conclusion in April 2010. Many vice-chancellors are privately banking on Cubie using his powers of veto if a stalemate with the unions arises (p.44).

The direction of travel wished for by Policy Exchange has come to pass, and Andrew Cubie has indeed on occasion used his powers of veto to support the position of the employers in undermining DB pensions. But a focus on larger governmental policies and processes should not remove the focus from either UUK or from individual employers.

Documentation from UUK, EPF, and their consultants indicate that those actors have helped to influence this direction of travel. Research has indicated that ‘the current flight from DB schemes is not simply the collective result of individual companies’ careful assessment of a changing environment’, but rather than heads of organisations, in conditions of uncertainty ‘also decided to close their schemes because they observed others doing so, and because they were influenced by the actions of consultants’ (p.776). In understanding the recent attack on DB pensions in UK higher education, we need to take seriously the role of UUK, in alliance with consultancy firms, in shaping future possibilities and constraints in very particular ways.

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This paper represents the views of the author only. The author believes all information to be reliable and accurate; if any errors are found please contact us so that we can correct them. We welcome discussion of the the points raised and suggest that discussants use Twitter with the hashtag #USSbriefs1; the author will try to respond as appropriate. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.